Does incentive-based pay really work?

When you know you have the potential of a bonus at Christmas, do you work harder in March? 

Does the possibility of extra pay tempt you to up-sell products or services to a client who may not really need them?

These are just two of the many vexing questions posed in the discussion about the merits of incentive-based pay schemes.

Despite the pervasiveness of such schemes in all sectors and the belief that workers are motivated by money to perform better, the evidence to support either notion remains weak.

Are we motivated by money to perform better?

In theory, the answer to this question is “yes”. Few people can afford to work 40 hours a week for no money.

But the question is not saying “Would you work for free?”, it is asking “If you were paid a bit more, would your output increase, would you work longer hours or would you invest more time thinking about ways you could contribute more to the organisation?”

When this question is posed, the quick answer is often “How much more would I get paid?”. 

How much extra money is enough to change my behaviour?

The simplicity of this question hides a more complex answer. For most of us, no amount would be enough to change our behaviour. 

For example, imagine your boss offers to double your current salary in return for you increasing your output by 50 per cent. That sounds like a very attractive offer even after the ATO takes their share.

However, producing an extra 50 per cent will come at some cost to you in such things as longer working hours, more pressure, less time with your family or altered relationships with work colleagues or clients.

In the short-term both the money and the extra effort will be worth it, but is it sustainable?

Are annual bonuses linked to performance?

The annual bonus is not really an incentive payment because it is often not linked to performance. Most bonuses have an escape clause for the organisation as they are described as “discretionary” payments in the hands of the CEO.

This is a very sensible clause for the organisation because the decision to pay bonuses is influenced by many factors other than an individual’s performance.

For example, when the COVID pandemic hit, most organisations' finances took a massive hit. Despite employees working harder than they had ever worked, few organisations were able to honour the annual bonus payments.

Are there any circumstances where incentives might work?

All is not lost for advocates of the pay-for-performance models. Here are two vastly different situations where the incentive might have the desired effect.

Piece-work: Imagine you are a visiting backpacker working in WA’s south-west on a short-stay visa. You pick up a job at one of the local orchards and the owner offers you board and lodgings, plus a dollar amount for every kilogram of apples you pick each day. An arrangement like this might encourage you to get up early to maximise the income you can earn.

This incentive has a few things in its favour.  It is easily measurable, (just weigh the apples) the reward is very close to the effort (unlike the annual bonus which is several months away) and short-term.

Long-Term Contracts: Some CEOs and Board members have long-term incentives built into their contracts. They have a range of measures including average share price, work health and safety performance or the implementation of a particular project or strategy. The key here is the long timeframe with arrangements covering several years. This helps prevent the manipulation of results in the half-year or annual figures.

These long-term arrangements pose the question of whether the CEO’s effort or performance would differ if the incentives weren’t in place. It is nice recognition and reward for those efforts, however the individuals in these roles are often highly motivated and driven personalities anyway.

What about the rest of us?

If your workplace doesn’t look like either of the options above, then it might be wise to tread cautiously before offering financial incentives in return for some potential performance gain.

There are many other ways to reward and recognise your employees’ efforts and output including professional development, increased workplace flexibility and interesting assignments.

Whilst your employees might impulsively suggest they’d rather have the money, these alternative recognition options come with fewer unintended negative consequences and better results over a longer term.